ECONOMICS
REAL VS NOMINAL
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The rate of interest paid for a loan
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The real interest rate + expected inflation
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The face value interest rate-ex. you finance a car for 7% apr
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If you don’t understand all these, check this box.
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Detailed explanation-1: -Nominal interest rate refers to the interest rate before taking inflation into account. Nominal can also refer to the advertised or stated interest rate on a loan, without taking into account any fees or compounding of interest.
Detailed explanation-2: -The nominal interest rate, also known as an Annualised Percentage Rate or APR, is the periodic interest rate multiplied by the number of periods per year. For example, a nominal annual interest rate of 12% based on monthly compounding means a 1% interest rate per month (compounded).
Detailed explanation-3: -One example of a nominal interest rate is an interest rate quoted at a bank on any given day. If a bank advertises an annual interest rate of 2.59% on a car loan, this is the nominal interest rate. It is the amount of interest a person would pay in a year for borrowing funds to buy a car.
Detailed explanation-4: -It states that the nominal interest rate is approximately equal to the real interest rate plus the inflation rate (i = R + h). For example, a bond investor is expecting a real interest rate of 5%, when the market shows an expected inflation rate of 3%.